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2016-05-26

Martin Wolf: Monetary policy is not exhausted, and active use of it is essential. But undue reliance on monetary policy is problematic.


Extreme monetary policy can have unintended consequences

First, if inflation is zero or, still worse, if it turns negative, it becomes harder to secure needed changes in relative prices and wages. The obstacle here is nominal wage rigidity. This difficulty is particularly important in a multi-country currency union, such as the eurozone.

Second, under deflation negative real interest rates are possible only with strongly negative nominal interest rates. Without negative real interest rates, countries might end up in a prolonged period of deficient demand, elevated unemployment and weak investment.

Third, under deflation the real burden implied by a given level of nominal debt spirals upwards. This risks creating “debt deflation”, a condition explained by the US economist, Irving Fisher, in the 1930s. 

 Mario Draghi: low interest rates are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.

The question is how well monetary policy can remedy such a chronical deficient in demand. 

Do negative rates, for example, increase confidence by showing that central banks are not out of ammunition, or damage it by proving how bad the illness is?

Perhaps the biggest concern is that extreme monetary policy risks distorting asset prices and generating new financial bubbles.

If the fundamental difficulty is an excess of savings over investment, fiscal policy would be a better targeted remedy. 

Fiscal policy should play a far bigger part in demand management.

Martin Wolf, FT 25 May 2016


- Jag tycker det är skriande uppenbart att räntan världen över är för låg och att en större del av stimulanserna borde ske via finanspolitiken.

Det skrev jag på min blogg första gången den 5 december 2009.

Nu skriver jag det igen.

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